In July 1944 the leaders of 44 Allied countries met in a small New Hampshire town called Bretton Woods to discuss how to run the global economy in the post-war world.
The negotiations gave birth to institutions that dominate the global capitalist system to this day, including the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development, now part of the World Bank.
The conference also saw an agreement to fix their currencies against the US dollar, which was in turn fixed to the price of gold.
Bretton Woods represented a concerted effort by ruling classes across the globe to stabilise the world economy. They held that the absence of effective rules for international trade and finance had worsened the economic chaos of the 1930s.
The Bretton Woods system of fixed currencies functioned for nearly 30 years, until the US abolished the fixed dollar rate in 1971. The IMF and World Bank are still with us, hugely powerful international institutions that can dictate to whole economies.
Bretton Woods had profound consequences for the world. But it was only possible to achieve an agreement because of the peculiar circumstances of its time. In 1944 the US dominated the global economy in a way that is hard to conceive today.
Europe and Japan were close to total devastation. Russia was still a relatively weak economic power.
The US, in contrast, accounted for around half of the entire world’s output. And it was owed colossal sums by nations such as Britain, which had borrowed to fund their war efforts. Its ruling class was supremely confident that its writ would be as law.
US power and influence almost entirely determined the structure of the Bretton Woods negotiations. Heavily indebted participants wanted a set of international institutions that would allow them to pay off their debts and build their economies.
Economist John Maynard Keynes proposed an “International Credit Union” to do that, with economies forced to clear surpluses or deficits on their current account every year. This would allow debtor countries to pay off their loans with export earnings.
But the US was the world’s major creditor and argued forcefully against these proposals. Its ruling class was content with every other ruling class remaining in debt to it. A system to gradually remove these debts was not in its immediate interest.
Harry Dexter White was the treasury official who led the US delegation. He was “perfectly adamant” in opposing Keynes’s plan and whipped nations into line by threatening to withhold vital loans.
Dexter White proposed what became the World Bank to provide loans to developing and war-torn countries. The IMF was to maintain the system of fixed exchange rates.
He insisted that “the more money you put in, the more votes you have” and that “the US should have enough votes to block any decision” – a situation that still holds today.
Despite the deck being stacked in its favour, the US’s position weakened during the 1950s and 1960s as the global economy boomed. Although still the largest economy on earth, its absolute dominance receded.
Former debtor nations and defeated powers grew at unprecedented rates, while US growth rates were less dramatic – though still higher than in preceding decades.
The burden of Cold War expenditure and wars in Korea and Vietnam held the US back, even though this spending helped stabilise the system as a whole. Little by little, the great creditor turned into a debtor as competition ate away at its lead.
By 1971 the system of fixed exchange rates and permanent deficits that was supposed to promote US dominance had become a burden. The US was now a debtor economy and suffering from the very restrictions it had sought to place on the rest of the world.
The US president Richard Nixon removed the pegging of dollars to the price of gold, effectively ending the Bretton Woods system of fixed exchange rates. By 1976 all the world’s major currencies had their prices set by trading on the international foreign exchange market.
The IMF and the World Bank, intended as twin supports of the system, rapidly reinvented themselves as enforcers for the new ruling class creed of neoliberalism.
The partial recovery of the US economy did not restore it to anything like its earlier dominance. The US now accounts for about 25 percent of global output. Once small economies such as China are now major powers with their own interests. Today no single economy is able to enforce its will. That makes it unlikely that a “Bretton Woods II” will be created any time soon.
Each ruling class is, in the end, out for itself. The immediate interests of major creditors such as China are opposed to those of debtor economies such as the US. Germany, a manufacturing exporter, will want different rules to service economies such as Britain.
But competition can also take more serious forms. Germany sparked the wrath of its European allies by moving to protect its banking system. Gordon Brown has bullied hapless Iceland into submission. Barack Obama wants a huge bailout for US car manufacturers, tearing up free trade agreements in the process.
Already the World Bank is forecasting that next year will see the first decline in international trade since 1982. The world economy is going to shrink and remain depressed for the foreseeable future. Our rulers will become more desperate – and more dangerous – as a result.